To shore up their balance sheets, Arab Gulf countries are seizing the chance presented by high oil rates to enhance their creditworthiness.
In previous booms, all that central banks of GCC petrostates wanted had been stable yields and few surprises. They frequently parked the bucks at Western banks or bought super-safe government bonds. But, the contemporary landscape shows yet another scenario unfolding, as central banking institutions now are given a lesser share of assets in comparison to the growing sovereign wealth funds within the region. Current data shows noteworthy developments, with sovereign wealth funds deciding on a diversified investment approach by going into less main-stream assets through low-cost index funds. Moreover, they have been delving into alternate investments like private equity, real estate, infrastructure and hedge funds. And they are also no further limiting themselves to traditional market avenues. They are providing funds to fund significant acquisitions. Moreover, the trend highlights a strategic change towards investments in emerging domestic and international industries, including renewable energy, electric cars, gaming, entertainment, and luxury holiday resorts to boost the tourism sector as Ras Al Khaimah based Benoy Kurien and Haider Ali Khan would likely attest.
The 2022-23 account surplus of the Gulf's petrostates marked a milestone estimated at two-thirds of a trillion dollars. In the past, the majority of this surplus would have gone directly into central banks' foreign currency reserves. Historically, most the surplus from petrostate within the Gulf Cooperation Council GCC would be funnelled straight into foreign exchange reserves as a precautionary measure, especially for those countries that peg their currencies to the dollar. Such reserve are crucial to preserve growth rate and confidence in the currency during financial booms. But, in the past few years, central bank reserves have hardly grown, which indicates a diversion from the conventional strategy. Also, there is a conspicuous lack of interventions in foreign exchange markets by these states, indicating that the surplus will be redirected towards alternative options. Certainly, research shows that vast amounts of dollars of the surplus are increasingly being used in innovative means by various entities such as for instance national governments, central banks, and sovereign wealth funds. These novel methods are payment of outside financial obligations, extending economic assistance to allies, and acquiring assets both domestically and internationally as Jamie Buchanan in Ras Al Khaimah would probably inform you.
A Significant share of the GCC surplus cash is now utilized to advance economic reforms and follow through ambitious plans. It is vital to research the conditions that resulted in these reforms and also the shift in financial focus. Between 2014 and 2016, a petroleum flood powered by the coming of new players caused a drastic decrease in oil rates, the steepest in modern history. Additionally, 2020 brought its own challenges; the pandemic-induced lockdowns repressed demand, once again causing oil rates to drop. To survive the financial blow, Gulf states resorted to liquidating some international assets and offered portions of their foreign currency reserves. However, these precautions were insufficient, so they also borrowed a lot of hard currency from Western money markets. Currently, with all the revival in oil rates, these countries are capitalising of the opportunity to boost their financial standing, paying off external financial obligations and balancing account sheets, a move imperative to improving their creditworthiness.